JPMorgan, CFTC held talks a day after losses revealed

WASHINGTON (Reuters) - JPMorgan Chase & Co officials met with the U.S. futures regulator one day after revealing a $2 billion loss on trades booked in London, according to information from the Commodity Futures Trading Commission.

Five JPMorgan officials met with Democratic Commissioner Mark Wetjen to discuss the overseas reach of U.S. swaps reforms, which the banking industry has argued will put U.S. banks at a disadvantage and increase the cost of hedging.

But JPMorgan's now infamous trades -- which could generate up to $5 billion in losses and are now under investigation by the CFTC and other agencies -- have appeared to harden the CFTC's resolve to create a robust overseas regulatory regime.

The CFTC is in the process of finalizing some of the most critical swaps rules required by the 2010 Dodd-Frank financial oversight law.

"Some commenters have expressed the view that if a transaction is done offshore, it should not come under Dodd-Frank," CFTC Chairman Gary Gensler said on Tuesday at a Senate Banking Committee hearing about JPMorgan's trading losses.

"The law, the nature of modern finance and the experiences leading up to the 2008 crisis, as well as the reminder of the last two weeks, strongly suggest this would be a retreat from much-needed reform," Gensler said, referring to JPMorgan's losses.

The faulty portfolio was built on layers of supposedly offsetting bets with credit derivatives tied to corporate bonds.

The failed hedging strategy was executed by JPMorgan's Chief Investment Office in London.

Those trades, which are also under investigation by the Securities and Exchange Commission and the FBI, have prompted Chief Executive Jamie Dimon to suspend a $15 billion share repurchase plan and shaved roughly $30 billion off the market value.

Dimon revealed the trading losses on May 10.

On May 11, according to CFTC records released on Tuesday, Wetjen met with a group of JPMorgan officials to discuss "cross-border issues."

Among the attendees was JPMorgan's managing director and associate general counsel, Don Thompson, who testified before Congress earlier this year.

Overseas swaps regulation "not only goes beyond congressional intent, but harms the competitiveness of U.S. financial institutions with global businesses," Thompson said at a February House Financial Services panel.

Thompson echoed the arguments of many U.S. banks, which say broad cross-border swaps rules would force them to charge customers more than their unregulated competitors, driving customers away.

The CFTC and JPMorgan declined to comment on the May 11 meeting.

JPMorgan executives and Dimon have been a frequent presence in Washington, lobbying against what they say are excessive regulatory proposals that will constrain consumer credit and hurt economic growth.

JPMorgan and its units have met with the CFTC roughly 30 times since Dodd-Frank became law in July 2010, according to the CFTC's website.

Citigroup, Barclays and Morgan Stanley representatives also met with Wetjen on May 11 to discuss the same issue, according to the website.

REFORM PUSHBACK WEAKENS

The CFTC was tasked by Dodd-Frank with boosting transparency and limiting risk in the $708 trillion over-the-counter global swaps market.

Risky derivatives trading at overseas subsidiaries of firms like insurer American International Group severely damaged the U.S. financial system during the 2007-2009 credit crisis.

The global profile of risk prompted Congress to give the CFTC broad authority to regulate overseas swaps activity that has a "direct and significant" impact on U.S. commerce.

U.S. banks, including JPMorgan, had mounted a full court press to convince the agency to spell out a more limited view of its authority, while pushing bills through Congress to reduce it by law.

But the momentum behind the push has faded as financial reform advocates have pointed to JPMorgan's trading losses to highlight the need for tough overseas rules.

Last week, a House Agriculture panel suspended consideration of a bill that would have exempted the vast majority of foreign trades from some Dodd-Frank rules.

Republican Committee Chairman Frank Lucas cited the JPMorgan trading losses as a reason for the panel to slow down.

CFTC Commissioner Bart Chilton said the agency must be careful not to "overshoot" with rules that cut too deeply into the authority of foreign regulators, but agreed that the trading losses made a case for tough overseas application.

"The JPMorgan circumstance exemplifies that these are global markets and just because something is done in a jurisdiction outside of the U.S. doesn't mean that it doesn't impact U.S. customers, markets or potentially our economy," he said in an interview.

Gensler similarly called the trades a "stark reminder" of how overseas trading can transfer risk to the United States at a Financial Industry Regulatory Authority conference in Washington on Monday.

There he also laid out key elements of guidance the CFTC plans to release shortly on the reach of swaps rules.

In a major blow to banks, Gensler said that transactions between a foreign entity and either an overseas branch or a guaranteed affiliate of a U.S. firm will face U.S. regulation.